Is recruiting a board of directors really worth it? Absolutely -- if you want your company to grow
How much does a strong (or even a not-so-strong) board of directors really matter to a growth-oriented company? It might be the difference between success and failure.
Just ask Sally J. Smith, the president and CEO of Buffalo Wild Wings Inc., the Minneapolis-based franchisor of Buffalo Wild Wings Grill & Bar restaurants. Smith was recruited to the company in 1994 by a disgruntled investor who had lost faith in the business's management team and profitability prospects. "There wasn't any reliable accounting system in place," she recalls. "Even though some of the restaurants in the chain were doing more than a million dollars' worth of business a year, the company was losing money -- although nobody knew how much." One of the biggest strikes against it was a do-little advisory board that lacked sophisticated financial expertise and was unable to challenge the company's two founders. "We were on the verge of a major cash-flow disaster," says Smith, who started out in the role of chief financial officer and was later promoted to the top leadership post.
Working with two new advisory board members, including Buffalo Wild Wings' outside investor, Smith got to work on forming a strong new board of directors, one with the business qualifications and leadership authority necessary to force the entrepreneurial company back on track. Under the strengthened board's direction, Smith focused on two key objectives: revamping the company's accounting systems in order to give board members the timely, accurate financial reports they needed; and creating a series of financial plans to provide the board with specific turnaround goals, time frames, and standards of accountability. And the strategy worked: since 1996, sales have increased by more than 65%, to about $30 million this year, and the company is once again profitable.
For a private company struggling to navigate its way through the challenges of fast growth and the often treacherous capital markets, a strong board can provide valuable assistance in all kinds of ways. Unfortunately, many entrepreneurs are so worried about control that they either opt for no board at all or pad their boards with longtime friends or family members.
Either approach can become a costly mistake. "What entrepreneurs often don't realize is that a strong board can help a young or growing company build credibility in the outside world," explains Bill Vogelgesang, a managing director and principal in the Cleveland office of Brown, Gibbons, Lang & Co., an investment-banking firm. "A good board -- especially one with heavy involvement from other CEOs and decision makers -- reflects well upon a chief executive because it shows that he or she can take criticism and doesn't just want to impose one business vision on the company."
Savvy businesspeople often know the benefits of an activist board from past experience. Bruce Fador, president and CEO of Boston-based WorldStreet Corp., a Web-based securities-industry company, learned of the importance of such a board when he was running fast-growing First Call Corp.
"At WorldStreet, I've got seven people on my board now -- six of them outsiders," says Fador. With the three-year-old company in an intensive-growth phase, fueled by a recent $15-million round of financing, the CEO meets with his board every six to eight weeks. "I have confidence that they will kick my butt in a very focused way, if that's appropriate," he says. "We all need to be at industrial strength as we work toward our next level."
For entrepreneurial companies interested in setting up boards of their own that will build credibility and enhance growth strategies, here are five points to keep in mind:
1. Creating an effective board does involve taking some risks. Ben Boissevain, a managing director of E-Technologies Associates, a New York City-based investment-banking and -advisory firm, often sits down with his entrepreneurial clients to warn them that the key issues are "control, credibility, and access." He explains: "A well-connected board of experienced outsiders will give your company a lot of credibility in the business world as well as potential access to financing sources and other business opportunities. The countervailing force, which you also need to take seriously, is that you give up some measure of control the more outsiders you put on your board." Translation: a strong, active board -- with a majority of members from outside the company -- has the power, at least in theory, to replace a company's management if it loses confidence.
That said, the risk of a total management overhaul should be minimal in a company with a good business plan and a strong management team. "A board isn't there to replace management but to enhance it," Sally Smith notes. "My feeling is, if we suddenly went off course, the last thing the board would do is suddenly make massive changes. I would expect our board members to look for ways to help us deal with our problems -- things like 'Here are the resources we can provide' or 'Here's the way we've dealt with this issue in the past.'"
2. When considering a prospective board, view it from the outside world's perspective. "The issue of what constitutes the best board makeup is one of the most heavily debated business issues," comments Steve Buffone, a partner in the New York City office of the law firm of Gibson, Dunn & Crutcher. "If you're setting one up -- and want to know how the banking or investment community will evaluate it -- it's probably helpful to know the prevailing wisdom: the most effective mix is 75% to 80% outsiders."
Personal chemistry does matter: unless a board is being put together in a crisis situation, it makes sense to take the time to find qualified outsiders who have a good rapport with a company's leadership, not to mention an informed interest in its industry's challenges.
If your board has only five seats, then the company's chief executive will probably be the only insider to serve on it. If there's room for another insider, he or she should represent a key operating function, typically that of finance or marketing.
3. The best boards are 'a mile wide and an inch deep.' That's the assessment of Michael E. Frank, a general partner at Advanced Technology Ventures, a venture-capital firm with offices in Waltham, Mass., and Palo Alto, Calif., that typically considers about 5,000 business plans each year -- before choosing 20 or so companies to invest in. With that amount of exposure to the market, Frank has a pretty good sense of what works and what doesn't.
"What you're looking for in an effective board is a group of mostly outsiders who have been through the entrepreneurial process many times. They understand the generic operating issues that a growth-oriented company typically faces," says Frank. "Good board members also have a very broad range of contacts that they can reach out to, which may include possible financiers, strategic partners, or even potential customers."
Others recommend not limiting your search for board members to your community's equivalent of Bill Gates or Warren Buffett. "Companies can get tremendous benefit from thinking outside the box, which may mean approaching business executives in very different industries, or someone like a journalist who tracks the world of business from a very different perspective," advises Jeff Simmons, a partner at Raphael and Raphael, a Boston accounting firm.
The bottom line here: it's the breadth of contacts and experience that brings the best payoff to growing companies, rather than specific knowledge of any particular product or tiny market niche. When you have the right big-picture group in place, you can always supplement its expertise with an advisory board. "We might encourage one of those to be set up that would be focused around one particular product or technology, if that seems necessary. But you don't want to waste a valuable board seat on this level of expertise," Frank advises.
4. Look for board members who can complement, rather than replicate, insiders' strengths. One helpful exercise recommended by Patrick J. Boroian, a general partner at Sprout Group, the New York Citybased venture-capital subsidiary of Donaldson, Lufkin & Jenrette, involves creating a candid list of your own strengths and weaknesses. "Very few entrepreneurs have all skills. It's rare for someone to understand operations, finance, sales and marketing, and human resources, and to be a great leader as well," he notes. "So what makes the most sense is finding board members who can complement your own skills set."
In some cases, especially if your company is small or a start-up, you may not be able to attract the right kind of board members, at least not on your own. In those cases, setting up an informal team of advisers can provide you with valuable outside guidance. But upgrade the group as soon as possible, perhaps with the assistance of an outside investor or with a strategic business partner, once you form ties to more well established companies.
5. Remember that your board is your company's face in the outside business community. According to Vogelgesang, prospective investors frequently analyze the caliber of a company's board before deciding whether or not to get involved. "It's not at all uncommon for them to pick up the phone and call board members," he says. "If they wind up speaking to your brother-in-law and your best friend from kindergarten, that's not going to speak too well of you or your company."
Be prepared to make changes if necessary, especially as new investors get involved. Depending on the size of their financial stake in your company, investors will often insist on at least one and sometimes two or more seats. Some venture capitalists and other private-equity firms will go a step further and require reconstruction of the board -- from scratch -- and sole veto power on selecting its members. Although business owners may object to an investor's inflexibility on that point, the result is probably in everyone's best interest. After all, strong boards usually help build strong companies.
Jill Andresky Fraser is Inc.'s finance editor.
The ABCs of building a great board
You want to do it, but you don't know how. Here's a blueprint for creating the kind of board that can help your company achieve its growth objectives.
The legal side is simple. Depending on state regulations, creating a board of directors can be as simple as filing a descriptive amendment to your certificate of incorporation or corporate bylaws, or including a description when you file for incorporation. So don't delay because you're worried about the cost or time involved.
Scheduling rules are flexible. If your company is growing fast or facing a range of complex business or financing issues, you may want to meet as often as every four to six weeks. For very young or mature companies, quarterly meetings will probably be adequate.
Size can kill. Don't load up your board with so many people that you'll never get anything done. A good rule of thumb: Five to seven well-qualified members is all you'll need.
Compensation really matters. To attract the best team to your company, be prepared to pay for travel expenses (so that you won't be tied only to local talent), a token stipend (up to $1,000 per meeting), and a small stock-option package, if that's appropriate to your industry and growth plans.
Professionalism is essential. Once you've set up a top-quality board, treat its members accordingly. That means holding meetings as scheduled, promptly reimbursing them for expenses, keeping accurate minutes of meetings, and otherwise doing everything you can to help your board work well for your company.